Interpretive Letter to Name Not Public
August 7, 2001
This is in response to your request for a written statement clarifying the type of insurance products that NASD Regulation, Inc. considers "investment-related," as described in the "Explanation of Terms" section of the Form U-4. You asked whether a registered representative employed by a member firm is required to report on her Form U-4 civil litigation and/or a customer complaint involving a non-securities product, i.e., a fixed annuity insurance product.
In subsequent correspondence, you indicated that the complaint/litigation at issue was not received by the member and did not pertain to a product or service provided through the member. You indicated that the complaint/litigation related to the registered representative's outside insurance business activities. You indicated that the member discovered the complaint/litigation through a verbal discussion with the registered representative during a routine annual branch inspection conducted by the member's home office, and that neither the member nor any of its representatives had ever received the complaint/litigation verbally or in writing.
Additional correspondence indicated that a customer had purchased two fixed annuities from the registered representative and had sued her, among others, in connection with the imposition of a 9 percent penalty charged to the customer when she surrendered the fixed annuities more than six months after the “20 days free look” period had expired. The customer's lawsuit alleged common law fraud, violations of a State Insurance Code, negligence and negligent concealment, and breach of an alleged common law fiduciary duty in connection with the purchase of the annuities. The letter indicated that the registered representative settled the lawsuit for an amount in excess of $10,000. The letter stated: "On April 24, 2000, the court entered the nonsuit Plaintiff filed as to all causes of action. . .The legal effect of this Notice is to withdraw, abandon and dismiss all causes of action asserted."
You have asked whether the NASD considers a fixed annuity insurance product to be "investment-related" for purposes of the Form U-4 and whether the registered representative is required to report the complaint and/or settlement on her Form U-4.
The determination of whether an event is required to be reported on the Form U-4 must be made in good faith by the member and the individual who is the subject of the action based on the particular facts of the event. Question 23I of the Form U-4 requires individuals to report certain civil litigation, civil judgments, settlements, and consumer-initiated complaints pertaining to "investment-related" products. The term "investment-related," as defined in the "Explanation of Terms" section in the Form U-4 Instructions pertains to traditional, non-securities insurance products, as well as to securities. Under this definition, a fixed annuity insurance product would be considered "investment-related."
An affirmative answer to Questions 23I(1), (2), and (3)(a), however, also requires that the registered person have been involved in a "sales practice violation" with respect to the offer, sale or purchase of a security or in connection with the rendering of investment advice. "Sales practice violation" is defined in the "Explanation of Terms" section of the Form U-4 as:
. . .any conduct directed at or involving a customer which would constitute a violation of: any rules for which a person could be disciplined by any self-regulatory organization; any provision of the Securities Exchange Act of 1934; or any state statute prohibiting fraudulent conduct in connection with the offer, sale or purchase of a security or in connection with the rendering of investment advice.
In contrast, an affirmative answer to Question 23I(3)(b) does not require that the registered person have been involved in a "sales practice violation." In particular, an affirmative answer to Question 23I(3)(b) requires only that the individual have been, within the previous 24 months, the subject of an "investment-related," consumer-initiated, written complaint, not otherwise reported under Question 23I(1) and (2) that alleged that the individual was "involved" in forgery, theft, misappropriation or conversion of funds or securities. See Question 4 ("Are there any differences for reporting securities, commodities, banking, insurance and real estate complaints under Question 23I(3)(a) and (b)"), "Guidance on Forms U-4 and U-5" on the NASDR Web site.
Based on the facts you have provided, it appears that no affirmative answer is required for Questions 23I(1), (2), and (3)(a). Further, so long as the allegations of the complaint do not involve forgery, theft, misappropriation or conversion of funds or securities, no affirmative answer would be required for Question 23I(3)(b). Our conclusion is based on our understanding of the facts as you have provided them. Ultimately, the decision whether to report must be made by the member and the registered person based on all of the facts as known to both of you.
I hope this letter is responsive to your inquiry. This letter responds only to the issues you have raised based on the facts as you have described them in your letters and conversations with NASD Regulation staff, and does not address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation.
Shirley H. Weiss